Through the years, some buyers have executed effectively by proudly owning British American Tobacco (LSE: BATS) shares. For some, value actions have helped. However the important thing attraction for a lot of is the dividend. It has grown yearly for many years.
A giant dividend lower introduced at present (25 February) at one other firm has nothing to do with the cigarette maker.
So why do I feel it may finally spell unhealthy information for the British American Tobacco dividend?
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Swingeing dividend lower at FTSE 100 agency
The lower in query was at Diageo (LSE: DGE). Till lately, it additionally had raised its dividend per share yearly for many years.
Enterprise has been getting trickier over the previous couple of years for the distiller and brewer. Weakening client sentiment makes individuals much less more likely to splash the money on costly premium spirits.
A brand new boss with a client items and retail background has come onboard and his method is to slash the dividend and attempt to make the corporate extra aggressive. I interpret that to imply cheaper pricing amongst different issues.
Which may work at Tesco or Unilever – and maybe it’ll turn into the bitter medication Diageo wants.
However for now it strikes me because the incorrect repair for a premium spirits firm. As a Diageo shareholder I’m furious concerning the lower, which I see because the incorrect monetary precedence.
Expensive dividends might be a sexy goal for cuts
However Diageo is just not British American Tobacco. So why has my thoughts turned to that firm’s payout, at present yielding 5.2%?
Elevating dividends yearly for many years is dear. Final 12 months, British American Tobacco spent £5.2bn on dividends. That was effectively over double the £2.3bn Diageo spent on shareholder payouts.
Shifting demand panorama
Over at Diageo, there’s an ongoing debate about whether or not the corporate is in a foul spot due to momentary financial pressures, or its market has modified for the long run as fewer individuals drink alcohol.
Relating to tobacco, that debate has lengthy since been settled. Few individuals would argue that the tobacco trade goes to see something apart from falling cigarette gross sales over the long run.
British American nonetheless shifted 465bn sticks final 12 months – however that was 8% decrease than the prior 12 months.
And this can be a best-in-class operator, with robust distribution networks, premium manufacturers like Fortunate Strike, and longstanding trade experience.
Will the dividend final?
Present administration has acknowledged it goals to continue to grow the dividend yearly. If it fails to take action, I feel it could have to fall on its sword.
However what if a brand new boss is available in and slashes the payout, as we have now seen at Diageo and in addition noticed at tobacco rival Imperial Manufacturers in 2020?
It’s undoubtedly a danger.
If Diageo’s transfer finally ends up paying off, that would make it simpler for a fellow FTSE 100 agency like British American to promote buyers on an enormous dividend lower. I see that danger as increased at present than it was yesterday, earlier than Diageo’s lower.
Nonetheless, British American stays a money era machine and it has additionally been rising its non-cigarette enterprise. Even weighing the danger of a lower, I proceed to see it as a share for earnings buyers to contemplate.
